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Passive investors, not passive owners

May 16, 2014

A look at Vanguard's approach to proxy voting and corporate governance

Glenn Booraem is a principal in Fund Financial Services and serves as Controller of the Vanguard funds. He is responsible for a variety of fund accounting and administration functions, including fund valuation, compliance monitoring, and corporate governance; he joined Vanguard in 1989 and has spent his entire Vanguard career in fund accounting and administration roles. Mr. Booraem is a member of the Vanguard Pricing Review Committee, Proxy Oversight Group, and Disclosure Oversight Group and has served on the New York Stock Exchange's Proxy Working Group and Commission on Corporate Governance.

As we enter "proxy season"—when investors in most U.S. companies vote at shareholder meetings on matters such as the election of directors and the approval of executive compensation plans—it seems appropriate to take a closer look at who we are as a company and how we approach corporate governance at the companies in which we invest.

Simply stated, Vanguard's core purpose is "To take a stand for all investors, treat them fairly, and give them the best chance for investment success." This message has been consistent since our founding, and making sure the companies our funds invest in are subject to the highest standards of corporate governance truly exemplifies our mission.

While our approach of quiet diplomacy has led some to conclude that our voice is silent on many debates, we believe that our effectiveness is maximized by taking our message directly to those companies where we believe changes are needed.

Because our funds own a significant portion of many companies (and in the case of index funds are practically permanent holders of companies), we have a vested interest in ensuring that these companies' governance and executive compensation practices support the creation of long-term value for investors—a key to achieving investment success.

We believe that effective corporate governance creates an appropriate balance between the rights and responsibilities of owners, directors, and managers. Likewise, compensation programs should encourage and reward long-term performance and be sustainable (not like the sometimes fleeting advances in stock prices sought by traders and those who attempt to profit from pricing inefficiencies in the market).

Our advocacy on this front is driven by governance and compensation principles that reflect our long-standing views. The most visible sign of Vanguard's advocacy is our funds' proxy voting at shareholder meetings; each year, every vote we cast is publicly disclosed. We have an experienced team of analysts that independently evaluates each proposal and casts our funds' votes in accordance with our voting guidelines.

By its nature, voting reduces sometimes complex issues to a binary choice—between FOR and AGAINST a particular proposal—making it a rather blunt instrument. In contrast, our engagement with the directors and managers of the companies in which we invest provides us with the opportunity to target feedback and messaging more precisely than voting alone. So while voting is visible, it tells only part of the story.

We believe that our active engagement demonstrates that passive investors don't need to be passive owners. In fact, our involvement in hundreds of direct discussions every year has taught us that we can accomplish as much—if not more—through dialogue than through voting alone. Through engagement, we're able to put issues on the table for discussion that aren't on the proxy ballot. In essence, we continually strive to provide constructive input that will, in our view, better position companies to deliver sustainable value over the long term for all investors.

While our approach of quiet diplomacy has led some to conclude that our voice is silent on many debates, we believe that our effectiveness is maximized by taking our message directly to those companies where we believe changes are needed. Equating the frequency of an investor's votes against management with their commitment to great governance is an oversimplification. While there are companies whose practices need to change and shareholder proposals that deserve attention, broadly condemning corporate initiatives and blindly supporting shareholder proposals ignores the complexity of the issues at hand. We believe that our independent analysis, supported by meaningful engagement, puts us in the best position to cast well-informed votes and positively influence corporate conduct.

The bottom line is that we believe that the vast majority of boards and management teams are appropriately focused on the same long-term value objectives as we are. This translates into broad support for most matters proposed by corporate boards. Do we always get it right? Probably not. Are there votes that, in retrospect, we'd reconsider? Absolutely. However, we're committed to striving to evolve and refine our approach to corporate governance to serve our core purpose—one company, and one vote, at a time.